Happy, uh, New Year

My wife always makes fun of me after reading my columns because, as she says, “they are always such downers”. I can’t really argue with her on that one. But in my defence, I really am trying to call it as I see it. Anyway, she’s going to love this one. So without further ado, allow me to make my predictions for 2010.
My 2010 predictions can be summed up in one word: “insolvency”. To be insolvent is to be unable to pay one’s debt obligations. In my view, this trend will only get stronger on the individual, institutional, and state level.
Many countries are in serious financial trouble. Ireland’s public services have been drastically slashed with emergency budgets in an effort to pay its bills. Credit-rating agencies recently downgraded the credit-worthiness of Greece and Dubai. The U.S. and the U.K. have been warned of possible future downgrades.
The individual level is no better. In the U.S., bankruptcies are up by over 30 per cent so far in 2009. A similar story is emerging in Canada, albeit not as drastic.
My main concern, however, is with the banks. Western banks are so highly leveraged you can almost hear their top-heavy structures beginning to creak and crack. In the United States, over 130 banks have gone bankrupt in 2009. The top five Canadian banks are even more highly leveraged than the big banks in the states. According to a Sprott Asset Management report, these Canadian banks are leveraged at an average of 31:1, meaning a mere drop in their tangible assets of three per cent would effectively wipe out their worth.
The Sprott report suggests the only reason Canadians banks sidestepped the 2008 crash was because of a stealth government bail-out of $114 billion. It wasn’t called a bailout, of course; it was merely a “liquidity injection” courtesy of the Canada Mortgage and Housing Corporation ($65 billion), the Bank of Canada ($45 billion), and the Canada Pension Plan ($4 billion). Apparently all it takes to sedate the Canadian population is to change the terminology, or in the case of CPP, bury it on page 32 of your investment board’s 2009 annual report.
So the situation is risky even if you take their financial statements at face value. The problem is their financial statements, at least in the U.S. and Europe, are effectively “cooked”. The bank failures happening in the United States are quite revealing in this respect. Take the recent failure of AmTrust Bank, for example. It reported assets of $12 billion against deposits of $8 billion – not highly leveraged at all. Yet the government had to cough up $2 billion (25 percent) to cover people’s bank deposits. In other words, a large portion of their so-called “assets” were phony. This story is playing out again and again south of the border.
Whether the insolvency story is kicked further down the road or explodes in 2010 is anyone’s guess. But it is certainly something to watch out for. Happy New Year!